6 Top Factors that affect Credit Score Negatively

6 Top Factors that affect Credit Score Negatively

A good credit score offers numerous opportunities to a borrower, including negotiation power, desired loan amount, priority over other applicants (as compared to the applicants with a low or fair credit score), lower rate of interest. Contrary to this, a bad credit score is a reason behind the rejection of multiple loan applications, higher rate of interest, among others! Thus, it is important to understand the severity of a bad credit score and the factors that affect it negatively.

What are the Factors that affect Credit Score Negatively?

Listed below are some of the possible factors that affect credit scores negatively. If they are not resolved within time, they can create a never-ending loop that starts from a bad credit score, multiple loan application rejections, hard inquiries and again back to a bad credit score.

Irresponsible Payment History

Irresponsible credit repayment history is one of the factors that affect the credit score negatively. It showcases the inability and irresponsible behaviour of the borrower towards the payment of loan EMIs and credit amounts. And sometimes, it may even take years to improve/regain the credit score.

Solution- It is advised to pay off the debt on time. If in case, a borrower fails to manage the credit payments due to some genuine reason, he/she can connect with the concerned authorities to request a grace period.

High Credit Utilization Ratio

It is recommended to use only 30% out of the total credit amount. A borrower using more than the given percentage showcases his/her dependency on credit amount, which results in a declined credit score.

Solution- A borrower should manage to use the credit utilization ratio judiciously. In case of higher credit requirements, the borrower can connect with the concerned lender, bank or financial institution to grant a higher credit amount. However, the use of only 30% of the credit utilization ratio remains applicable on higher credit amounts too.

Unpaid Credit Amount

Delayed/missed/outstanding/partially-settled credit payments- all result in a lower credit score. Such payments are further reflected in the credit report and can hinder the process of loan or credit card approval.

Solution- It is a good idea to set reminders for loan EMIs and credit payment due dates. In case of an outstanding credit balance, the borrower can convert the outstanding amount into easy EMIs. This way, he can prevent himself from being overburdened. Also, if a borrower prefers to pay by cheque, he should ensure to deposit the cheque a few days before the due date.

Credit Report Errors

A credit report is the accumulation of a borrower’s credit history and credit repayment behaviour gathered from banks, lenders, and financial institutions. Any error/issue/comment in the credit report can impact the borrower’s credit score severely.

Solution- If there is any issue or error in the credit report, it is important to raise a dispute with the concerned authorities at the earliest. It is further advised to review credit reports at least twice a year.

Hard inquiries

Hard inquiries are those that are made by lenders whenever a borrower applies for a new loan or credit. These inquiries, within a particular period of time, show the borrower’s multiple attempts to acquire a loan or credit card. Frequent hard inquiries highly impact the credit score and can even bring down the score drastically.

Solution- A borrower should refrain from making numerous credit inquiries, at least within a particular time period. It is suggested to wait for some time before applying for a fresh loan.

No Credit Mix

A negative credit score is also the result of a borrower’s inability to maintain a balance between secured and unsecured loans.

Solution- A good credit mix is basically a healthy balance between secured and unsecured loans. Thus, a borrower should figure out ways to manage both types of loans or he/she can connect with an expert for more clarity.

How to Improve Credit Score?

Listed below are a few possible ways to improve credit score; however, it is important to note that these ways will not work like magic in a day. It takes time to improve or regain a good credit score.

  • Make timely credit payments every month
  • Do not leave any outstanding credit balance
  • Maintain the right balance between secured and unsecured loan
  • Make sure to use the credit utilization ratio judiciously
  • Resolve the errors in the credit report
  • Do not apply for a loan or credit card immediately after the rejection of an application
  • Set up timely reminders for loan EMIs and credit card monthly payments
  • Ensure not to leave any partially settled amount or minimum balance left
FAQs
What are the most common factors that affect the credit score?
Out of many factors that affect credit score, a few among them are- delayed or missed payments, half-settled payments, numerous hard inquiries, higher credit utilization ratio.
How can I score a 900 credit score?
To get a 900 credit score, you need to pay debts on time, not make frequent credit inquiries, use 30% of the credit utilization ratio and ensure to resolve comments or errors in the credit report.
Is 800 a good credit score to buy a house?
A credit score anywhere between 750-900 is considered excellent. An applicant with a credit score within the given range often qualifies for earlier approval of loan amount.
What are the benefits of a higher credit score?
A borrower with an excellent credit score is given priority over applicants with a lower or fair credit score. Apart from this, a borrower can get numerous benefits like- lower rate of interest on the loan, negotiation power, desired loan amount, access to rewarding credit cards, etc.
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